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Russell Investments ESG Global Equity Pool

Significantly reduce exposure to carbon risk while gaining equity exposure and the potential for growth

As organizations move to align their investments with their values, managing a portfolio has become increasingly complicated. The need to manage volatility and pursue portfolio growth remains, but can be balanced with the need to follow an environmental, social and governance mandate.

The Russell Investments ESG Global Equity Pool (“ESG Pool”) is a global equity strategy that goes beyond reducing a carbon footprint - our solution tilts a portfolio away from those companies with greatest exposure to carbon-related risk and towards those companies expected to contribute to, and benefit from, the energy transition. The ESG Pool also excludes investments in companies that produce tobacco, alcohol or firearms.

As an equity mandate, the actively managed multi-manager ESG Pool invests in a select portfolio of high-quality companies with defensive characteristics and a value orientation, offering an attractive risk/return trade-off.

The result is a portfolio that allows clients to align their investments with their core values of environmental, social and governance responsibilities while still providing equity exposure and the potential for growth.

Investment approach

The ESG Pool is designed to reduce the portfolio’s total exposure to carbon footprint and fossil fuel reserves by 50%, while avoiding the sector biases that can occur with a pure divestment approach. Based on the insight gained from our research into decarbonization strategies, we have developed a novel, rules-based solution that is designed to help our clients meaningfully reduce exposure to carbon-intensive holdings, and invest more in climate-resilient and renewable energy opportunities without materially impacting performance. The strategy will continue to evolve as the carbon management sector develops.

The ESG Pool also commits to have zero holdings in tobacco, firearms and alcohol industries and aims to achieve an ESG score greater than the MSCI World index.

More than just a carbon reduction solution

Our quantitative portfolio construction approach tilts the portfolio away from those companies with high exposure to carbon-intensive activities and increases weight in those companies with positive environmental, social and governance (ESG) characteristics and/or involved in the development of renewable energy sources.

Avoids unintuitive outcomes by not optimizing tracking error

It is extremely important for a low carbon strategy to have a direct relationship between a company’s carbon footprint and their subsequent weight in the portfolio. The use of
an optimization model which targets low tracking error can compromise this direct relationship and result in unintuitive outcomes such as two securities with the same CO2 emissions held in opposing active positions in the portfolio.

Proactive evolution over time

As the carbon market matures and listed companies improve their reporting and transparency, we will adapt the strategy as new opportunities and risks become apparent in the market. Unlike index replication strategies which will rely on you to decide whether to adopt a new index or make additional changes to your portfolio over time, we are committed to actively evolving the solution for you.

Strategy objectives

Eliminate exposure to companies with more than 20% of revenue from coal-related activities unless carbon capture and storage procedures are used).

Exclusion of tobacco and firearms.

Invest in companies expected to positively contribute to the transition to renewable (‘green’) energy sources.

Ensure aggregate portfolio has positive bias towards companies with high environmental, social and governance (ESG) characteristics.

Maintain tracking error of no more than 1% vs. the Russell Investments Focused Global Equity Pool.²

How the approach is designed to be wider than just carbon reduction.

Factor

Strategy

Definition

CUSTOM ESG EXCLUSIONS

Zero holding

Tobacco, firearms, alcohol

CARBON EMISSIONS

50% reduction relative to MSCI World

(Scope 1 + Scope 2 CO2Emissions)/Total Revenue

CARBON RESERVES

50% reduction relative to MSCI World

Carbon reserves/Total assets

ESG SCORE

Greater than MSCI World

Aggregated E,S, & G score

RENEWABLE ENERGY EXPOSURE

Greater than MSCI World

Green energy/Total energy

COAL EXCLUSION

Zero holding

Greater than 20% revenues from coal-related activities

ACTIVE RISK

Less than 1% vs. a global equity fund²

Annualized tracking error (ex ante and ex post)³

¹Stranded assets – carbon assets of fossil fuels (coal, oil and gas reserves) at risk of sudden and unexpected write-downs because they can never be burned if the 2-degree coal is to be reached (AP4, 30 October 2015)

²As compared to Russell Investments Focused Global Equity Pool – an actively managed global equity fund without ESG screens. Tracking error is defined as the standard deviation of the difference between the returns of an investment and its benchmark.

³Ex-post tracking error is based on realized returns, whereas ex-ante refers to a predicted level of tracking error.

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Nothing in this publication is intended to constitute legal, tax securities or investment advice, nor an opinion regarding the appropriateness of any investment nor a solicitation of any type. This is a publication of Russell Investments Canada Limited and has been prepared solely for information purposes. It is made available on an “as is” basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.

Diversification and strategic asset allocation do not assure a profit or protect against loss in declining markets.

There are no assurances that the investing goals and objectives stated in this material will be met.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase returncould, at certain times, unintentionally reduce returns.

Russell Investments is the operating name of a group of companies under common management, including Russell Investments Canada Limited.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.